EU says no post-Brexit energy deal without UK payments

Industry says the move would cut hundreds of millions in Brexit-related energy costs

British and EU flags hang on the day of a meeting of British Prime Minister Keir Starmer with European Commission President Ursula von der Leyen, in Brussels, Belgium Oct 2, 2024. REUTERS/Yves Herman/File Photo

European Union countries will demand that Britain contributes financially to poorer EU member states' development as part of any deal to re-link the two sides' energy markets, according to EU documents and diplomats.

As part of efforts to reset relations following Britain's exit from the EU, the two sides agreed last year to start negotiations on British participation in the EU electricity market.

Industry says such a move would remove hundreds of millions of euros in annual costs that Brexit added to energy trade between Britain and the 27-nation EU. But a dispute over funding could complicate the energy negotiations that are due to start in coming months, diplomats said.

EU countries want Britain to contribute funding to EU cohesion - jargon for reducing inequality by funding development in poorer member states - in exchange for regaining access to the EU's internal energy market, diplomats told Reuters.

The situation would mirror that of Norway, which is not in the EU but has access to the EU's internal energy market and has contributed about 391 million euros ($466 million) a year in grants to EU cohesion.

A similar deal for Britain would be politically sensitive as Brexit supporters said while campaigning for Britain's departure that regaining control of British contributions to the EU budget would be an upside of leaving the bloc.

The governing Labour Party pledged before coming to power in 2024 to reset relations with the EU and reduce barriers to trade. But Reform UK, which leads opinion polls, sees close energy ties with the EU as a threat to UK sovereignty.

EU SEEKS FINANCIAL CONTRIBUTION

An EU document setting out the bloc's negotiating position said Brussels wants to "establish a permanent, legally binding mechanism for the appropriate financial contribution of the United Kingdom towards reducing economic and social disparities between the regions of the Union".

A British government spokesperson declined to comment on the energy talks but said: "Closer cooperation on electricity will bring real benefits to British businesses and consumers—helping to drive down energy costs, strengthen energy security and attract investment in the North Sea."

Brexit resulted in a decoupling of trade on the power interconnectors between Britain and EU countries including France and Denmark. In practice this means trades are conducted manually, rather than through a more efficient algorithm that maximises trading capacity and lets power flow unhindered to where it is needed most.

The post-Brexit arrangement has added costs of about 1 billion pounds ($1.38 billion) to UK-EU power trading and could rise to 350 million pounds per year by 2030, Britain's National Grid told a parliamentary committee meeting this month. Ultimately, those costs feed into consumers' energy bills.

EU countries are still debating the size of a potential British financial contribution, and plan to finalise their mandate for negotiations in the next few months, diplomats said.